Telcos dial intelligent automation and cloud solutions as opex pressures build

Telcos are seeking new ways to reduce opex in the face of flat or declining revenues, as recent research from MTN Consulting reveals.

While capex investments garner a lot of industry attention as evidenced in the telco earnings reports, opex as a cost category is ~5x the size of capex. Optimizing the operational cost base is therefore vital if telcos are to remain competitive and improve service quality.

One significant element of telco opex base is labor costs, which include salaries, wages, bonuses, benefits, and retirement/severance costs. For the annualized 1Q23 period, telcos spent $253.8 billion (B) in opex on their workforce, equating to 14.4% of revenues, versus 18.3% of revenues spent on capex the same period. Given the constant pressure of improving profitability, telcos are looking to reduce their labor costs. Besides, telcos are tackling external pressures to balance the requirement for a skilled workforce with cost-effectiveness, as skilled labor is both scarce and expensive.

Rising labor costs pinch telcos as inflation ensues

Labor costs are spread across many different units of the typical telco, from sales or management through to network operations. Telcos worldwide have been trimming their employee base for a long time – telco headcount stood at 4.55 million in 1Q23, much less than the peak of 5.18 million in 1Q14. Despite the headcount reduction, telco spending on their workforce rose to 22.0% of opex (excluding D&A costs) for the annualized 1Q23 period, from 20.0% in annualized 1Q14 period – see figure 1 below.

Figure 1. Labor costs % opex ex-D&A, annualized

Telco spending on digital transformation and technologies has facilitated a smaller but digital-savvy workforce. Vodafone and BT are prime examples. While Vodafone is adding 7,000 software engineers to its European workforce by 2025, it announced plans to cut 11,000 jobs globally in the next three years. BT’s digital division plans to double its workforce by hiring 2,800 software professionals by April 2024, but the group also plans to shed 55,000 jobs by 2030. MTN Consulting expects headcount reductions to continue via implementation of automation and AI tools, attrition, and voluntary retirement schemes, heading towards 4.17 million by 2027. Despite headcount reductions, the average telco employee is getting costlier due to labor market competition and the need for more expensive skills. For instance, Verizon’s average telco employee salary, represented by labor costs per employee, grew from $87.6K in the annualized 1Q14 period to $112.8K in 1Q23 annualized – see figure 2 below.

Figure 2. Verizon: Labor costs per employee (US$K) – annualized

Lately, inflation has caused further pressure on labor costs. Rising living costs have increased demands for higher wages from employees in competitive labor markets. For instance, Telefonica agreed to raise 2023 wages for almost 13,000 workers in Spain amid high inflation. BT also agreed to a EUR1,500 pay rise for 85% of UK staff. In the US, Verizon, Charter Communications, and T-Mobile made headlines for boosting minimum wages of employees to $20 per hour. With these conditions likely to persist along with elevated demand for highly-skilled talent, MTN Consulting projects the average telco employee salary to continue rising, reaching US$66K by 2027.

Network costs remain stubbornly high at ~50% of total telco opex

The network is the factory for any telecom operator, and the need to make it more agile, scalable, and adaptable has become more apparent now than ever. However, telcos are struggling to manage the rising costs of running and maintaining their networks. Data from our latest study of telco opex suggests that network-related costs – comprising network operations, network infrastructure (rental/leasing, interconnection, and spectrum costs), utilities (90% of which is assumed to be network-related), and depreciation and amortization (85%) – accounted for about 50% of total opex for each of the years 2016 through 2022. These costs can vary by company, however, rising for instance, from the mid-30% range for Comcast and Charter Communications, to over 70% for PLDT and Airtel, and 80% of total opex for Tata Communications.

Among the four network cost components, depreciation and amortization costs amount to the largest single category within total opex, averaging 22.6% during 2016-22 period. This is due to telcos’ capital-intensive operations. Network operations is the second most significant expense category, with an average share of 17% over the 2016-22 timeframe.

As network costs constitute half of telcos’ total opex, they can severely impact a telco's ability to thrive in a competitive market and maintain customer satisfaction. Rising energy prices and demand for faster data-intensive services have only made matters worse. This puts a burden on telcos to bring down network costs while balancing the need for constant investments to upgrade networks. The situation has forced telcos to explore ways to mitigate such costs without passing them on to customers.

Technology-enabled solutions will be the vital cog in the ‘telco cost-savings’ wheel

As telcos strive to optimize costs, they will pump investments in the following three broad areas, each of which has the potential to hit multiple cost bases:

Intelligent automation: AI-powered automation, or intelligent automation, will be a key enabler to achieve savings in cost areas such as networks (through automated fault detection and self-optimization systems), and energy (dynamic shutdown of unused network elements during idle time). For instance, STC deployed Ericsson’s AI-based cognitive software solution to boost network performance even during demand surges.

Virtualization: Software-based technologies such as software-defined networking (SDN), network function virtualization (NFV), and vRAN (virtualized RAN) are growing in importance in the 5G era as they enable faster deployment of the network infrastructure needed to support the ever-increasing number of connected devices. By centralizing network management and reducing hardware dependency, these solutions may offer reduced network-related costs such as infrastructure rentals, RAN power consumption, repair and maintenance, etc. For instance, Verizon has deployed over 8,000 vRAN cell sites with a goal of deploying over 20,000 by the end of 2025.

Cloud services adoption: Cloud infrastructure enables telcos to scale their operations more efficiently, pay for resources as needed, and reduce the capex associated with physical data centers. By migrating critical functions and workloads to the cloud, telcos can cut energy costs by deploying custom-designed energy efficient hardware and architectures developed by cloud providers, and drive personalized marketing and customer experiences by turning customer data into insights with cloud data and analytics. For instance, StarHub partnered with Google Cloud and Nokia to move its 5G core network to Google’s cloud platform.